IRS Scandal Has Charities Worrying About ‘Collateral Damage’

Charitable nonprofits worry that investigations revving up in Washington over the IRS' targeting of conservative groups will further delay applications for tax-exempt status and impede their activities.

By Michael S. Fischer|May 16, 2013 at 08:18 AM

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Not all nonprofits are the same, but many U.S. charities fear they will be caught up in the controversy surrounding the IRS’s targeting of some of their nonprofit cousins, applicants for advocacy status.

Charitable nonprofits, those with 501(c)(3) status, worry that investigations now revving up in Washington over allegations the IRS targeted conservative groups for extra scrutiny will further delay applications for tax-exempt status and impede their activities.

Tim Delaney, head of the National Council of Nonprofits, in a statement said he and his colleagues were concerned that the scandal was causing “collateral damage to the work of innocent charitable nonprofits” by lumping together all nonprofits and failing to draw distinctions among different types.

He urged policymakers and the news media “to strengthen public respect for, and not exacerbate ignorance of, the laws governing and distinguishing the nonpartisan work of charitable nonprofits in communities across the country.”

The Tax Code exempts 501(c)(3) status “charitable nonprofit” organizations from taxation, but prohibits them from engaging in partisan political electioneering activities. They can conduct “insubstantial” lobbying activities.

Such charitable groups are not the focus of the swirling scandal. That dubious distinction goes to “social welfare” organizations, some of which were reported to have been given special scrutiny by the IRS.

These are tax exempt under the Tax Code’s section 501(c)(4), and are allowed to engage in some political activities: nonpartisan issue and legislative advocacy, lobbying and endorsement of specific legislation. They cannot, however, overtly support or oppose political candidates. Contributions received from businesses or individuals for lobbying or political activity are not tax deductible.

Delaney told The Chronicle of Philanthropy that many thousands of charities seeking tax-exempt status approval may now face delays as investigators on Capitol Hill look into how the IRS handled applications from advocacy groups.

According to The Chronicle, the IRS manages 60,000 applications for tax-exempt status each year. In 2012, only 3,500 applications came from advocacy groups.

A lawyer who represents nonprofits told The Chronicle that charities without tax-exempt status cannot solicit donations in a number of states, and are not eligible for lower postal rates or most foundation grants. “It affects their fundraising and getting their message out,” the lawyer said.

Charities may also become more timid in their advocacy than they are already, fearing to lobby Congress about budget issues, according to Patrick Lester, director of federal fiscal policy at the Center for Effective Government. “IRS investigations, even if they are rebuffed, will make those organizations even less likely to become involved in those issues,” he told The Chronicle.

Faced with a public relations crisis not of their own making, charitable nonprofits must communicate with their stakeholders about the differences between themselves and social welfare groups “to lessen any confusion that may exist,” Trisha Lester, vice president of the N.C. Center for Nonprofits, said in a recent Philanthropy Journal article.

“The former group may not engage in any political activity as that is strictly prohibited by the IRS.”

In his written statement, Delaney also worried that the current scandal is distracting the IRS from its assigned duties.

As the “cop on the beat enforcing the tax laws that govern all nonprofits,” he said, the IRS is being diverted from enforcing against fraud, lawfully screening applications for tax-exempt status and providing help to the public and charities about appropriate stewardship of donor resources.

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